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How the EDD Could Shut You Down

02 - marijuana The California Employment Development Department (EDD) is on the hunt for what it callsunderground economy operations. And that could mean you.

To the EDD bureaucrats, these 'underground operations' are any economic activity that operates out of compliance with applicable labor or tax laws. A Medical Marijuana Dispensary (MMD) is a prime candidate for this kind of classification.

From the EDD standpoint, any business that does not comply with the tax and labor laws gains an unfair advantage over other businesses that do comply. So, to them, its very simple - either you COMPLY or GO OUT OF BUSINESS.


MMD's can be funny places - and I don't mean "HAHA" funny either. For example, many MMD operators:

  • --> Don't pay their employees through a payroll service;
  • --> Don't pay sales tax;
  • --> Don't keep track of sales transactions;
  • --> Have no point of sale (POS) soft ware to manage sales transactions;
  • --> Often pay their employees in cash or in kind (in marijuana or medicine if you prefer), and/or
  • --> Do not carry unemployment insurance for their employees. In fact, many operators consider their employees volunteers specifically because they pay them with marijuana instead of cash. Sadly, this is not the case. What you consider them is irrelevant - they are employees under the law.

Does Your Dispensary fall into any of these categories? Do you keep track of sales? Do you pay your employees in kind? Do you pay your sales tax?

If you are one of these operators - Your operation has become the target of the EDD.

Every operator of an MMD - including you - should be aware the EDD has created anEnforcement Arm known as the Employment Enforcement Task Force whose participating agencies include the EDD and the DIR (Department of Industrial Relations) who conduct On-Site Investigations of businesses.

The investigators interview owners, managers, and workers to determine if businesses are in compliance with payroll tax, labor and licensing laws. They show up and sniff around. They stick their noses into your business. And if they smell something funny - it can bebad news for you.

Failure to comply with these laws can result in heavy fines and often include criminal prosecution.

The EDD has the power to subpoena books and records of any MMD it suspects of unlawful or fraudulent activity. Unlawful activity, if detected, may only result in a fine, which could reach five figures (that means 10K or more). I don't care who you are - that's a lot of money. Even worse, fraudulent activity could lead to criminal prosecution as well as substantial civil penalties.

As I have advised my clients for many years, it is imperative that you conduct business professionally and legitimately. As we look toward the future of Medical Marijuana in California - those who survive will be those who learn how to play the game. And playing the game means acting like a professional and conducting business legitimately. (As you'll see later, this idea will be a constant theme on the blog - learn how to play the game or get thrown out. It's that simple).

But what does this mean? How do I learn how to play the game, Tony? Listen, this is what you do:
  • --(1) Put all employees on payroll;
  • --(2) Take proper employee payroll deductions and pay them to the proper agency (trust fund accounts such as Social Security Insurance and so on are the personal responsibility of the officers of the corporation);
  • --(3) Employ a certified public accountant (CPA) that understands Medical Marijuana issues to prepare and file annual tax returns;
  • --(4) Collect and pay state sales tax;
  • --(5) Put all eligible employees on workers compensation insurance; and
  • --(6) Comply with all applicable labor standards.

In short, start acting like a real business person. Not doing these things now is inviting financial disaster of epic proportions.

As an operator of an MMD - whether it's a non-profit mutual benefit corporation, patients association or a statutory cooperative - you have to be aware of the legal obligations placed on you.

The State of California considers your MMD to be an economic activity subject to the jurisdiction of the EDD, so take note friends. Don't let something so simple end your business.

We covered a lot of ground today and I certainly hope that today's post was helpful. As always, if you have questions or need any help getting the ball rolling - feel free to give us a call or shoot us an email.

You can't forget our number - (714) LAWYER-6

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Thanks for reading and stay well until next time my friends...